MNI INTERVIEW1: Kashkari Says He's Rate-Hike Holdout in Dots

Minneapolis Fed President Neel Kashkari told MNI Friday he's the lone FOMC official who prefers holding interest rates near zero into 2024 because in his view it will take longer to restore maximum employment, while backing Chair Jerome Powell's view on tapering bond purchases.

"Yes, that is me," Kashkari said in a phone interview when asked if he's the single person to pencil unchanged rates for 2023 into the FOMC's dot plot published Wednesday. "I anticipate the first raise in 2024."

"The last expansion took 10 years to put essentially everybody back to work and I certainly don't think it's going to take 10 years, but I think it may take longer than perhaps some of my colleagues think," Kashkari said. "I'm not sure we even achieved maximum employment before the pandemic hit. So if we are really going to achieve maximum employment before liftoff, I think it's going to take a little more time."

The Federal Reserve on Wednesday kept interest rates near zero while FOMC members were split on a rate increase next year. Chair Powell said scaling back the USD120 billion of monthly bond purchases could start in November and wrap up around the middle of next year, a timeframe Kashkari agrees with because he sees interest rates as the main tool for restoring the job market.

HOPING FOR BROAD RECOVERY

"The recovery is more underway so to speak, and so I think that taper that the Chair signaled is appropriate for the economic environment we expect to be in for the remainder of this year and for next year," Kashkari said. "I do think we would see the beginning of a taper later this year," if the economy progresses as expected, he said.

"Hopefully the overall context will be one of a recovery and a broad recovery where work most people can participate," he said when asked about his economic outlook through next year. Kashkari also said while inflation has obviously reached 2% in the short term, it's unclear that the undershooting seen in the past has been resolved.

"There are 5 to 7 million Americans who are not working today who would have been working had there not been a pandemic, that's still a lot of people," he said. "That's why I'm in the camp of, hey, let's be more patient with the federal funds rate until we assure we have achieved maximum employment."

Patience with interest rates doesn't apply in the same way to quantitative easing, Kashkari said. "It's a reasonable thing to say you know what, we're going to dial back some of the quantitative easing, because we have made substantial progress in the labor market or we expect to have in the next few months but then use our primary policy tool, which is the federal funds rate, to get us the rest of the way there. I'm comfortable with that."

UNTAPPED LABOR SUPPLY

The Minneapolis Fed President said the last expansion showed the economy had surprising potential to bring in new workers and lift wages without sparking much inflation, and that's an important lesson to take into this recovery. "We're not going to prematurely raise rates as part of our new framework, and I think it's going to take a few years for us to fully rebuild the labor market and put everybody back to work."

The Fed's revised mandate for an inclusive job recovery is one way this will play out, he suggested. "Instead of preemptively tightening monetary policy in anticipation that inflation is around the corner, this forces us to say wait a second, there may be more labor supply out there," he said. "We kept hearing over and over and over again in the last expansion, we're out of workers, there's a worker shortage, and then miraculously businesses kept on hiring more people."

Kashkari has led the Minneapolis Fed since 2016 and started his career as an aerospace engineer before moving to Goldman Sachs, the Treasury Department and PIMCO. At Treasury he oversaw the TARP bailout program.